Insurers Complicate Plot for Asset Managers

May 13, 2010 (Business Daily/All Africa Global Media via COMTEX) -- Fund managers and investment advisers face renewed competition for retainers from insurance companies seeking to broaden their income streams as margins in the underwriting sector thin.

The entry of insurance companies into fund management is being driven by the ongoing separation of life business from general underwriting through the formation of holding companies which gives them leeway to engage in multiple businesses such as asset management.

"We are going into asset management as a new income avenue as the new structure will allow us to manage funds generated by the insurance businesses", said Ashok Shah the managing director of APA Insurance.

The insurance industry is estimated to be holding gross premiums amounting to Sh64 billion while the asset management sector has Sh300 billion excluding the National Social Security Fund (NSSF).

With insurance companies being one of the main clients for fund managers, the restructuring has allowed insurers to form holding entities which will create avenue for new income stream.

"There is a perceivable increase in insurance companies entering asset management business with the implication of locking out other players from managing their assets", said Job Kihumba, executive director of Standard Investment Bank.

Globally, large insurance companies such as Old Mutual tend to have their asset management wings.

Mr Kihumba reckons that the trend is set to gain momentum, but cautions that good governance and separation of fiduciary duty is critical to ensure optimum return on the investments and avoid conflict of interest.

In Kenya, most insurance companies tend to have independent investment firms to manage their premiums, a situation that is set to change, denying investment firms a lucrative income stream.

"There is a natural fit between insurance business and fund management especially for long-term business such as life insurance, pension schemes which insurance companies can manage under guaranteed scheme," said Rogers Kinoti, a fund manager with ICEA Asset Management.

According to Mr Ashok, the drive into asset management will provide insurance companies with the comfort of not having to worry about their investment.

Whereas industry players note that the insurance firms have ahead-start by virtue of the premium they collect, the industry is quite complex and takes longer to attract good business.

"The industry is competitive, which has eroded the margins and with established players it is difficult to break into as it requires qualified and experienced personnel who attract premium and brand building; this takes time and resources," said Paul Mwai, the chief executive officer of African Alliance Kenya Management.

With the Retirement Benefit Authority (RBA) allowing pension schemes to invest 100 per cent of member contribution in guaranteed schemes, insurance companies have a head-start as they are the sole provider of such services.

However, Mr Kihumba says insurance companies will still need players such as stockbrokers for transactional and advisory services, a possibility that has the potential of cushioning the investment advisers.

"They will require services such transactional services, advisory and market research, opening other revenue avenues for the rest of the industry." The industry has huge potential for growth hence new players will broaden the product menu to meet other untapped markets, says Mr Mwai.

He says competition is likely to be experienced on the personnel front as there are fewer qualified fund managers.

The restructuring of insurance is part of the reforms being implemented in the sector to ensure proper management of premiums.

The reform is intended at addressing the emerging issue where long-term business premiums have been used to settle claims from general insurance.

APA Insurance will join the ongoing drive by insurance companies to form a holding entity.

APA Insurance and Apollo Insurance are related entities and the restructuring will result in the formation of Apollo Insurance Holdings.

Mr Ashok indicated that the restructuring will allow APA Insurance to focus on general business with Apollo handling life.

Currently Apollo Asset Management has Sh6 billion of asset under management.

Mr Ashok indicated this would be grown by targeting other large sources of funds such pension schemes and other insurance companies.

In terms of investment options, the growing interest in corporate bonds, formation of Real Estate Investment Trust (REIT) and entry of private equity firms offer attractive choices in deploying the funds.

Other insurance companies that have subsidiaries involved in asset management include British American Asset Managers (BAAM) of British American Insurance, CIC Asset Management of CIC Insurance, ICEA Asset Management associated with ICEA Insurance and Madison Asset Management belonging to Madison Insurance.